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Routier and another v CRC, Supreme Court, 16 October 2019
In her will, Beryl Coulter had left her residuary estate on trust for the purpose of building homes for elderly residents in Jersey.
The trust was established under and subject to Jersey law, so was not a charity under ITA 2007, s 989. HMRC said the will had not effected a transfer to ‘a trust established for charitable purposes only’ because IHTA 1984, s 23 required it to be established in the UK. As a result, it said the executors were liable for inheritance tax of £600,000. The matter proceeded to the High Court which found for HMRC, as did the Court of Appeal.
The taxpayers said HMRC’s determination was incompatible with article 63 of the Treaty on the Functioning of the European Union (TFEU) which forbids restrictions on the free movement of capital between EU member states, and between member states and third countries. HMRC said article 63 did not apply because a movement of capital between the UK and Jersey should be regarded as an internal transaction taking place within a single member state.
The Court of Appeal agreed that Jersey should to be regarded as a third country for the purposes of article 63, but said the restriction in s 23 was justifiable under EU law.
In the Supreme Court Lord Reed and Lord Lloyd-Jones gave the judgment with which all members of the court agreed.
The judges said the decision of the Court of Justice of the EU in Prunus SARL v Directeur des Services Fiscaux (Case C-384/09) [2011] STC 1392, in which the court held that the British Virgin Islands were to be treated as third countries, determined the issue in the instant case - Jersey was to be considered a third country for the purpose of a transfer of capital from the UK. As a result, the EU rules on the free movement of capital applied to transfers of capital between the UK and Jersey and HMRC’s refusal of relief under s 23 was a restriction on that free movement. The question was whether the restriction was justifiable under EU law.
The judges said the only restriction on s 23 was that imposed by the judicial gloss placed on the words in ITA 2007, s 989 in Camille and Henry Dreyfus Foundation Inc v CIR [1956] 36 TC 126. This, when incorporated in s 23, had the effect of confining relief under that provision to trusts governed by UK law. This gloss was incompatible with EU law and could not be justified. They ruled that the trust did qualify for relief under s 23.
The taxpayers’ appeal was allowed.
